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July 7 — The primary challenge facing the Securities and Exchange Commission as it once again
tackles the issue of board diversity is defining what “diversity”
actually means, corporate governance experts told Bloomberg BNA.

The commission must consider the “multiple dimensions of diversity,” said Stanford
law professor and former SEC member Joseph Grundfest. Beyond gender, there are numerous
ways to classify ethnic diversity, “and the classification challenges in this space
are legendary,” he told Bloomberg BNA in an e-mail.

Will the agency, for example, define who is African-American or will it leave it to
directors to self-identify, or will the agency require that the corporation classify
each director's ethnicity? Grundfest asked. In addition, how will the agency approach
disclosures when directors prefer not to be classified or when they can claim multiple
heritages?

“Some diversity advocates are also calling for greater representation of the LGBT
community in the boardroom,” he added. “Will the agency call for disclosure of sexual
preference as part of this initiative?”

The commission further must think carefully about the objectives it is seeking to
achieve through its disclosure regime, and how those objectives are rationally related
to the agency's mission, Grundfest said.

White's Speech

In a June 27
speech, SEC Chairman Mary Jo White said the SEC staff is working on a recommendation that
would require companies to disclose more information about the diversity of their
director nominees (125 CARE, 6/29/16).

White said that a rule adopted by the agency in 2009 requiring companies to disclose
whether, and if so how, they consider diversity in choosing directors hasn't had much
of an impact.

The SEC chair also cited statistics showing that U.S. companies trail their counterparts
in other countries in terms of board diversity. According to White, women held 15.2
percent of board seats at Fortune 500 companies in 2009, and that number has only
increased to 19.9 percent over the last six years. She also observed that the percentage
of the top 200 companies in the S&P 500 with at least one minority director decreased
from 90 percent in 2005 to 86 percent in 2015.

“The low level of board diversity in the United States is unacceptable,” White said.

Narrowing the Definition?

One of the primary defects of the 2009 rule is that it didn't define “diversity,”
some observers said.

Companies took an over-broad view of the term, said Charlotte Laurent-Ottomane, executive
director of the Thirty Percent Coalition, an organization of 80 members that includes
public companies and institutional investors.

A narrower definition is necessary in order to make a rule more effective, said Laurent-Ottomane,
whose organization is committed to the goal of women, including women of color, holding
30 percent of board seats in public companies. “Gender, race and ethnicity is what
we are talking about” when it comes to diversity, not what university a candidate
went to, she told Bloomberg BNA.

While most companies disclosed that they do in fact consider “diversity” when appointing
directors, only about half have defined diversity in the “socio-demographic terms
of gender, race, or ethnicity” said Serena Fong, vice president of government affairs
at Catalyst, a nonprofit organization whose mission is to accelerate the progress
for women through workplace inclusion.

Fong told Bloomberg BNA that many companies consider diversity in terms of experience,
rather than gender or ethnicity. “In the absence of additional guidance about what
the term means, companies have been able to demonstrate that they do indeed take some
form of diversity into account, but the current disclosures have been ineffective
in advancing gender and racial/ethnic diversity in the boardroom,” she said.

Recommendations for the SEC

Nonprofit group Catalyst suggests a “comply or explain” approach that would make companies
disclose, or explain why they don't have policies for:

director term limits;

representation of women on boards and in executive officer positions; and

the board or nominating committee's consideration of female representation in the
director identification and selection process.

Requirement such as these “enable investors to make more informed decisions,” Serena
Fong, vice president of government affairs at Catalyst, told Bloomberg BNA. “Investors
and shareholders look to the government to ensure that they have access to the information
necessary to assess a company’s integrity.”

Difficult Task

There are a million factors that can go into diversity, Peter Gleason, president of
the National Association of Corporate Directors, told Bloomberg BNA. “It's a complex
issue,” he said, adding that the SEC has a tough task ahead of it in coming up with
an effective rule.

It may be hard for the SEC to put one diversity dimension above another because it
is so business-dependent, Gleason continued. To find the “right recipe,”
the SEC staff may have to review corporate filings for disclosures that it considers
particularly good, he said.

Gleason also noted that companies must do a better job of explaining what they are
considering when it comes to diversity. Shareholders want to know why a board's composition
represents the best combination of skills, experience, background and diversity that
will help the company perform at its highest level, he said.

Requiring Disclosures

In addition to defining the term, the SEC must also consider what it wants companies
to disclose, observers said.

Lissa Lamkin Broome, a law professor at the University of North Carolina, told Bloomberg
BNA in an e-mail that a simple requirement that would allow shareholders to easily
discern the gender and racial/ethnic make-up of board nominees could be beneficial.

Determining the race/ethnicity of a director often isn't obvious, so why not just
have the company disclose it? she asked. “If shareholders care about having a diverse
board, they can express their preference with their vote or in discussions with management
and the board about presenting a more diverse slate of board nominees,” Broome said.
“If shareholders don’t care about the diversity of the board, then they can ignore
this disclosure.”

The North Carolina State Treasurer's Office and eight other large pension funds petitioned
the SEC in 2015 to adopt new disclosure requirements that indicate a director's gender,
race and ethnicity in a chart or matrix that also includes his or her skills and experience (13 CARE 713, 4/3/15).

Broome, who assisted the treasurer's office in preparing the petition, said the chart/matrix
approach alleviates concerns about information overload because it is intended to
be a “one-page snapshot.”

“I don’t think this proposal presents much of an additional burden to the company
beyond having each director confirm his/her gender and race/ethnicity, she said.

To contact the reporter on this story: Michael Greene in Washington at
mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at
ywilczek@bna.com

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